TOL

Toll Brothers, Inc. - 10-Q Summary (Period Ended July 31, 2005)

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Toll Brothers, Inc., a luxury homebuilder, for the nine-month and three-month periods ended July 31, 2005 (Fiscal Year 2006). The company operates in 48 markets across the United States, focusing on luxury move-up, active-adult, and urban/suburban niches. As of July 31, 2005, the company controlled over 79,500 home sites.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 57% for the nine-month period and 54% for the three-month period compared to the prior year. This was driven by a 37% increase in the number of homes delivered and a 13-14% increase in average selling prices.
• Profitability: Net income surged 117% (nine months) and 103% (three months). Home sales gross margins improved, with costs of sales as a percentage of revenue decreasing by 400 basis points (nine months) and 500 basis points (three months) due to price increases outpacing cost increases.
• Backlog Expansion: Backlog increased 48% year-over-year to $6.43 billion (9,490 homes), driven by a 35% increase in new contract values ($5.56 billion) over the nine-month period.
• Debt Restructuring: In June 2005, the company issued $300 million of 5.15% Senior Notes due 2015. Proceeds were used to redeem $100 million of 8% Senior Subordinated Notes and repay a $222.5 million bank term loan. This resulted in a $4.1 million pre-tax charge for early retirement of debt.
• Acquisition: The company acquired the Central Florida Division of Landstar Homes in June 2005. The acquisition price was not material, and deliveries from this acquisition had a minimal impact on earnings for the quarter.

Guidance, Outlook, and Risks

• Fiscal 2005 Outlook: Management expects to deliver between 8,562 and 8,662 homes with an average delivered price of $655,000 to $658,500. Net income is estimated to increase approximately 80% compared to fiscal 2004.
• Fiscal 2006 Outlook: Projected deliveries are between 10,200 and 10,600 homes with an average price of approximately $665,000. Net income is expected to increase approximately 20% over fiscal 2005.
• Liquidity: The company maintains a $1.2 billion unsecured revolving credit facility (no borrowings outstanding as of July 31, 2005) and $505.9 million in cash. Leverage ratio was 0.53 to 1.00, well below the 2.00 to 1.00 covenant limit.
• Risks: Key risks include fluctuations in interest rates, availability and cost of land, regulatory approval delays, and changes in economic conditions. The company notes that inflation in construction costs could compress margins if not offset by price increases.
• Accounting Changes: The company is preparing to adopt SFAS 123R (Share-Based Payment) for fiscal 2006, which will require expensing stock-based compensation. Pro forma net income for the nine months ended July 31, 2005, would have been $484.1 million under this standard.

Investor Verification Checklist

• Backlog Conversion: Verify the rate at which the $6.43 billion backlog is converted into revenue over the next 9-12 months to confirm fiscal 2005 delivery targets.
• Land Commitments: Review the $3.59 billion in land purchase agreements and the $267.1 million in deposits paid to assess future capital requirements and flexibility.
• Margin Sustainability: Monitor whether the 400-500 basis point improvement in gross margins can be sustained given potential increases in labor and material costs.
• Debt Maturity Profile: Confirm the stability of the debt structure following the refinancing of the 2009 notes and term loan, noting the new 2015 maturity.
• Tax Rate Volatility: Track the effective tax rate, which increased to 39.1% due to changes in state tax estimates and FAS 109 adjustments.